It has always been clear that the NZ economy would get back on its feet one day. Thanks to the previous Labour government’s prudence (zero net government debt) we weathered the global financial crisis in good shape and were out of recession in the June quarter of 2009, before the Nats’ first budget.
We should have taken off again then, like Australia, but Australia had a plan and we did not. We had the Nats. Their misguided “expansionary austerity” budgets stifled the recovery. Instead of “roaring out of recession” or the “aggressive recovery” that we were promised, we have just limped along – because the Nats cut when they should have (like Australia) stimulated the economy.
The evidence for the foolishness of austerity measures is growing ever stronger, as Britain (where the Tories are the leading proponents of this nonsense) has gone to the brink of a triple dip recession. Paul Krugman has been leading the criticism:
Paul Krugman’s call to arms against austerity
An interview with the Nobel prize-winning economist, whose book roundly attacks the ‘delusional’ deficit-reduction strategy
…More than four years on, austerity is being questioned as never before, not least because most countries implementing a deficit-reduction policy have failed to grow. Krugman, his blog and comments on Twitter, have become the focal point for objectors worldwide.
Speaking to the Guardian to publicise the second edition of his book End This Depression Now, he argues that his battle will go on until policymakers realise that their reliance on deficit reduction is a “delusional” misreading of basic economics. But despite his persistent criticism, austerity remains the default position for most western governments.
Here in NZ our own Bernard Hickey is the voice of reason (though he could learn a thing or two about snappy headlines!):
NZ PM Key defends government drive to return to surplus and start reducing debt despite doubts overseas that ‘expansionary austerity’ is actually working
Prime Minister John Key has defended the government’s focus on returning to budget surplus and reducing the government’s debt load, saying it made sense to strengthen the nation’s balance sheet through government debt reduction, given households remained indebted and foreign debt was still high.
He also warned that higher debt could trigger credit rating downgrades that increased New Zealand’s interest rate premiums.
His comments followed intense debate over the last month in Europe and the United States over a strategy of reducing government debt to improve economic growth rates.
The strategy has relied on academic research by US economics professors Carmen Reinhart and Kenneth Rogoff into the connections between government debt and economic growth, in particular in this academic paper ‘Growth in a time of debt’ published in 2010. It suggested a tipping point was reached when government debt rose over 90%, significantly reducing growth rates to below zero%.
However, those conclusions were questioned last month in another academic paper which said the Reinhart/Rogoff was based on a spreadsheet error and was skewed by the omission of data on episodes of high debt, including, most importantly, in New Zealand from 1946 to 1949, when our country showed both high growth and high debt. …
However, Key said the government remained committed to its strategy of returning to surplus by 2014/15 and then reducing debt from almost 30% of GDP in 2017 to 20% of GDP by 2020. The Reserve Bank pointed out in its March Monetary Policy Statement that the government’s austerity strategy was driving a tightening of fiscal policy equivalent to 3.2% of GDP over the next four years, which was a factor dampening momentum in the economy.
Well we’ve been here before, but currently we have another round of “green shoots of recovery” type stories, and talk of an optimistic budget. No doubt we’ll be hearing a lot more of this spin, but keep in mind that the bulk of those “green shoots” are due to factors beyond the Nats’ bidding (the stimulus of the Christchurch rebuild, and the good performance of old Labour-built assets the NZ Super fund and ACC). Unfortunately as Russel Norman points out, the real economy of the jobs market and the tradeable sector is still getting worse.
We will get there in the end no doubt, but it will be in spite of this bungling Natational government, not because of them. All National have done is hold us back for four years.